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Bulls certainly won out in 2013 with excellent returns in world markets. This kind of growth is going to be difficult to repeat, but all signs point to another year of double-digit returns in 2014.

Signposts for a strong 2014

Analysts predict growth in the world stocks markets is set to continue on the back of a number of factors; strong US-led growth, highly accommodative global monetary policy, low interest rates and rising bond yields.

Central to the continued growth is an acceleration in corporate earnings as there is now less scope for further revalaution-led gains. In the short-term there is little threat from rising inflation given the degree of economic slack in most countries.

It would be unfair to call equities cheap anymore, in fact many are certainly at fair-value prices. But investors are likely to continue to be driven into them by the prospects of low returns, or even losses, in bonds and negative real returns on cash.

What are Analysts saying?

Analysts from the world’s investment houses are singing a very similar tune to the beginning of 2013 with an 11% growth in global earnings projected. In particular analysts seem to be most optimistic about the EU and Japan.

Even the die-hard bears believe that the current momentum in markets is going to carry into 2014, although warnings are being sounded of a correction. Depending on the investment house we could expect global returns to be anywhere between 10-15%+. The US is projected to have one of the lowest upsides and as it accounts for 50% of the world equity market this is bringing down the global average.

If not the US, then where?

As mentioned above, the US is predicted to be in for tempered growth in 2014 and is therefore underweighted with most analysts. That being said, there will be no bull market without the US participating so we shouldn’t write it off. US investors will always prefer their own market, where they perceive the best companies in the world to be.

Emerging markets look set to underwhelm again in 2014 as fears that Fed tapering will unsettle bond and currency markets. It also looks like we are set to see earnings disappointments from these regions.

Analysts believe the EU is still largely under-owned by institutional investors and that this will change in 2014. Some are touting a 30%-40% increase in Earnings Per Share (EPS) over the next three years for the Eurozone, resulting in an overweight rating. Europe is an area where valuations still seem to be reasonable and with risks in the region falling we are likely to see equities strengthen.

Substantial Quantitative Easing is likely to continue in Japan and the country looks like it could be set to exit deflation. Valuations are reasonable and with a decline in oil prices we might see institutions increasingly move from bonds to equities.

The UK has strong economic prospects as a recovery continues to take hold, but is neutrally weighted with most analysts. There is some scope to outperform in the latter stages of the year, but the strong GBP could cause problems. The UK index is strongly weighted towards defensive sectors, resources and energy, which are all highly exposed to emerging markets.

Sectors to watch

Analysts see strength in the technology, financial and healthcare sectors, while they are bearish on utilities and telecoms. Valuations of mega-caps appear to be low but their are structural issues to their consistent performance so the outlook is not certain. A weighting towards mid-small caps will likely results in outperformance as economies continue to recover.

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